automatic check. But theoretically it is quite possible to have a managed currency. Keynes suggested it, and the Riksbank in Sweden is apparently going to adopt it.

In the Ukraine there was money issued by various governments that went through various revolutions during the war. At one time it was under a German general, and he issued some paper money, and then he was overturned; but that paper money continued to circulate, and because it was limited in quantity, it was the most valuable money in the country. It is chiefly a question of quantity and the only danger, the only fallacy, the only unsoundness in paper money is because the political policy may not be sound.

Mr. STRONG. And the fact that every one who had a scheme to offer would want fiat money to do it with.

Professor FISHER. It is a very dangerous thing, but I think that ideally, if you had it internationally, or under an international commission

Mr. STRONG. Some of the leaders of our farm organizations and of some other organizations are advocating that we pay the soldiers' bonus in fiat money. Well, I can see how that would not hurt so much, if that was all that there was a demand to issue fiat money for, but when you commence to build roads and public buildings and pay Government debts and pensions, that would be using printing press money as they did in Germany, world without end.

Professor FISHER. You would have a tremendous pressure in Congress. Everybody would say, "It won't cost you anything; just run your printing press"-unless you established the idea that the price level must be maintained.

Mr. STRONG. That would destroy the price level.

Professor FISHER. Yes; but I am in favor of retaining the gold standard and using it as it really is. Its only use to-day is for international settlements.

Mr. BUSBY. In that connection, do you not feel that by using gold as it is used to-day, by quantity, for international settlements, each country would so arrange its measure as a domestic proposition, using this gold in the varying dollar quantities, if necessary, when you found you were not doing the right thing to affect price by your credit arrangement, so as to relate that gold to commodity prices and have your central point like a magnetic pole to which you could attract prices back if they went too high, or up if they went too low? Professor FISHER. Yes.

Mr. BUSBY. And in that way stabilize your commodity prices, and also automatically stabilize your money?

Professor FISHER. Yes, but what I tried to emphasize, Mr, Busby, is that to-day we are in an unusual position in reference to gold. Gold has little independent force to-day, because so many countries have given it up. It is a drug on the market. It is overshadowed by credit to-day and it is concentrated in two countries, so that to-day we get very little regulatory value out of gold itself. If one little country, like Switzerland, should take gold as fixed by the other countries of the world and adjust its currency by regulating the size of the dollar, or the franc, its action would not affect the value of gold appreciably, To regulate their price level they would have to change the weight of their gold franc. Switzerland is too small. But if this great country tried, I think we could regulate our price level without changing the

weight of the dollar. For years ahead, unless there should be some further cataclysm, there would probably not be any difficulty both in maintaining the price level and the weight of the dollar as it is, both at the same time.

Mr. BUSBY. I did not mean to divert you.

SUGGESTIONS FOR THIS BILL

Professor FISHER. Now, to take up the three sections of this bill, and to comment on each of the three sections:

I would really like very much, and I think it would help you in your committee work, if you would be able to put, in terms of figures of some sort, and based on the authority of some expert, impartial student or students, your justification for taking 1926 as the basis, or some substitution for 1926 rather than taking it for granted.

Mr. STRONG. You have yourself said that 1926, being an average in between 1921 and 1929, when we did stabilize, would be a satisfactory point.

Professor FISHER. I would, up to 1929. I would have said that up to 1929, but now we have fallen so far down since 1929 that you will have to take account of the new contracts in the last three years. They ought to be given some weight. If it is true that there are few of them by comparison

Mr. STRONG. I was going to accept your judgment, rather than hire somebody else or seek the advice of somebody else.

Professor FISHER. I think a little intensive work on the part of two or three students could give you some real criticism of that section which would be useful to you in either defending it or substituting something for it when you come to present your case to Congress, but if you go now and they ask you why you took 1926, and you say it is because you call that 100, they would think it is not much of a reason. Mr. STRONG. I would say because that was a very satisfactory period in our financial history.

Mr. GOLDSBOROUGH. It seems to me that that would be the least difficult thing to defend in the bill.

Professor FISHER. At any rate, I make that suggestion.

Mr. STRONG. Mr. Burtness has suggested to me that we might also say that, as far as we can judge, 1926 is about the base upon which most of our indebtedness has been contracted.

Professor FISHER. That should be a matter of study.

Mr. BEEDY. Has that been established?

Professor FISHER. I do not think so. I do not think anyone has made a study of these debts in relation to the present.

Mr. BEEDY. What would be the effect if we would go from 1921 to 1932? Why should we not, as a matter of fact, include the period between 1921 and 1932, and strike an average?

Professor FISHER. We should, but we should weigh each year's price level in proportion to the debts of that year contracted then by debtors and held then by creditors and still outstanding to-day for said debtors and creditors. That is exactly what I would like to do, take an average of from 1932 back as far as you would like, to the earliest debt now existing, but give the earlier year, say 1920, very little weight compared with 1929, which would have the biggest weight, or 1930.

Mr. BUSBY. Just prior to 1921 we had an awfully inflated condi tion. It would be fairer to go back to 1913, at a time when we had a gradual price rise, and hit this swelled period when there were a great many debts created that have since been renewed. You wil not have more than 1 per cent of variation from 1926 prices if you will include the period during the war as well as the period down to the present time; you would get on 1926 practically solid in your

average.

Professor FISHER. It may be.

Mr. STRONG. It would be a pretty hard study to determine the amount of the debts contracted in any one year and still existing. I have mine still existing.

Professor FISHER. In the second section, Mr. Chairman, you speak of the board as issuing debentures. I think you should have said the banks.

Probably there are many little technical points like that that ought to be looked into carefully before you present the bill to Congress.

Mr. GOLDSBOROUGH. Section 2 reads "and/or"-"the Federal Reserve Board and/or the Federal reserve bank."

Professor FISHER. Shall issue debentures of its own.

Mr. GOLDSBOROUGH. Yes.

Professor FISHER. The board is authorized.

Mr. GOLDSBOROUGH. Yes.

Professor FISHER. I do not know how to put it. It is a lawyer's proposition, but it looked to me as though it was defective in the language there.

In section 3, I strongly suggest that you add an authorization to make two separate gold prices possible, one for selling gold and the other for buying gold. Suppose, for instance, 10 years from now, or 10 months from now, or whenever it is, the Federal reserve system should make use of this section 3 and should announce that tomorrow, or next week-or if it should leak out, if they did not announce it, that the price of gold, instead of being $20.67 an ounce, was going to be $21 an ounce. Evidently people would now buy of the Govern ment at $20.67 an ounce, and sell back to the Government tomorrow or next week, making 33 cents an ounce out of the Government and embarrassing the Government in the meantime. You see, the Government price of gold is now the same for buying and selling For years and years, modern governments have had a buying and selling price which is uniform. A margin never occurs. It is different with a business man. A retailer buys at one price and sells at a higher price, and that margin is a normal thing with him, but Uncle Sam would be defenseless if we should say that he would buy and sell now at one price for both buying and selling and tomorrow to buy and sell at another price. People would immediately buy of him to-day and sell to him tomorrow, if prices were going up, or if he announced a fall in price, they would sell to him to-day and buy back tomorrow. In each case they would be taking it out of him. That was provided for in the original Goldsborough bill with a margin of 1 per cent, I think it was, and it was stipulated that the shift of this pair of prices should never be more than one per cent also. In that case no speculator could make any money; there would be no object in doing the speculating at the expense of the Government;

but, in order that the Government Treasury shall be protected, the Federal reserve system, when they make these changes, I think will have to have a spread between the buying and selling prices, and they ought to be given plenty of leeway here. I would let them raise or lower the price both of selling and buying to maintain the price level.

Mr. GOLDSBOROUGH. They could arrange that, of course, to meet particular conditions.

Professor FISHER. It ought to be so specified that they would know it.

Mr. GOLDSBOROUGH. I think your suggestion is a necessary one, but, you will understand, as we have announced here before, we purposely stripped this bill down as far as possible so as to confine the discussion to the principles involved, and then with the idea of rewriting the bill from a technical standpoint afterwards.

Professor FISHER. I think there ought to be a fourth section in the bill, to include a suggestion which came from the Federal reserve. The Federal Reserve Board, through a committee, worked out a new plan for reserves, to base reserves on velocity of circulation, and, instead of having merely three classes of reserves, 7 per cent, 10 per cent, and 13 per cent in the different cities, which was a guess at the various activities in those cities, to have it scientifically adjusted to the activities in every bank, in every city, so that the banks that had high velocity would have high reserve and so that the banks that had a low velocity would have a low reserve, and so that also, when the velocity accelerated, the reserve would automatically go up, and when, on the other hand, there is a depression and the velocity goes down, the reserve would automatically go down.

I think it is one of the cleverest and simplest things I have ever seen, and it was proposed in the Glass bill.

Mr. STRONG. Maybe we can put some stabilization in it.

Professor FISHER. I wish you could. I was authorized to offer to you, out of that bill, this clause, which I will call section 4 now in your bill:

Section 19 of the Federal reserve act of the United States Code, title 12, sections 461 to 466, inclusive, and section 374 as amended, is further amended and reenacted to read as follows:

"Reserves of member banks.-Section 19 (a) each member bank shall establish and maintain reserves equal to 5 per centum of the amount of its net deposits, plus 50 per centum of the amount of its average daily receipts, debits to deposit accounts, but in no case shall the aggregate reserves required to be maintained by any member bank exceed 15 percentum of its gross deposits."

That was very carefully worked out by the experts in the Federal reserve, and its effect is to make the reserves go up when business is going too fast, and to go down when business is going slowly, which, of itself, would have a great stabilizing effect.

Mr. STRONG. That would put a governor on it.
Professor FISHER. Yes.

111442-32-PT 1--25

STABILIZATION IN ALL POSSIBLE CONTINGENCIES

I have tried my hand, Mr. Chairman, in writing a memorandur here as to what I would do if I had my way. It is crude, because I am not a bill drafter, but it represents how I would probably proceed if it were all in my hands, and I have put it into three divisions. I call it, "Suggestions for a bill for restoring to normal, and thereafter stabilizing, the price level by methods fitted to operate successfully under substantially all circumstances." What I set myself was the problem to surmount every difficulty that you could foresee―i! gold should become scarce, or should go abroad; if the member banks should fail to cooperate whatever is necessary to overcome all those situations, and I put it under three heads:

"Division A, comprising legislation of immediate urgency," which is substantially what you have in the Goldsborough bill. a little less in fact.

"Division B, adding provisions needed to enable the Federal reserve system to stabilize independently, if need be, of member or other banks." Several people have said to me, "You can not in America stabilize, because you have so many banks, independent banks, and you can not make them behave. They are going to manufacture credit or stop manufacturing credit, and what can a Federal reserve system do about it?"

I think they could still do a great deal about it, if they had the requisite powers.

"Division C, adding features designed to bring about fuller cooper ation of banks and a unified national banking system."

That is to correct this lack of cooperation on the part of the banks, by compelling them to come into the Federal reserve system. I know that that will go against the grain of some a great deal, and I know it will be a consummation of perfection to get all of this done. but it seemed to me that it might be worth while recording here what one man has attempted to do to solve the stabilizing problem so as to meet all possible contingencies. The only thing, I may say, that would clearly break it down is a great war, where the Government itself would inflate, because it could not win the war otherwise. The Government would then itself be the law breaker and destroy the whole thing; but, except for that I do not see why those three methods do not really solve the stabilization problem in America under prsetically all circumstances.

If you want this, I will be very glad to offer it.

Mr. GOLDSBOROUGH. I think it is the concensus of opinion of the committee that that should go into the record.

(The memorandum of suggestions referred to is reproduced below

SUGGESTIONS FOR A BILL FOR RESTORING TO NORMAL, AND THEREAFTER STAHLIZING, THE PRICE LEVEL BY METHODS FITTED TO OPERATE SUCCESSFULLY UNDER SUBSTANTIALLY ALL CIRCUMSTANCES

Under three divisions, namely:

Division A, comprising legislation of immediate urgency.

Division B, adding provisions needed to enable the Federal reserve system to stabilize independently, if need be, of member or other banks.

Division C, adding features designed to bring about fuller cooperation of banks and a unified national banking system.